BLBG: Treasuries Little Changed Before $39 Billion Three-Year Sale
Oct. 6 (Bloomberg) -- Treasuries were little changed amid concern gains in Asian stocks will damp demand for safer assets at a $39 billion sale of three-year notes today, the second out of four auctions this week totaling $78 billion.
The Treasury will sell $20 billion in 10-year securities tomorrow and $12 billion of 30-year bonds on Oct. 8. U.S. debt has handed investors a loss of 2 percent this year, measured by Merrill Lynch & Co.’s U.S. Treasury Master index, as President Barack Obama increased borrowing to unprecedented levels to fund stimulus spending. A U.S. report yesterday showed service industries returned to expansion last month.
“Yields will rise this week because of the supply,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking Corp., part of Japan’s biggest bank. “Ten-year yields will end the year around 4 percent as the economy recovers.”
The yield on the benchmark 10-year note rose one basis point to 3.23 percent as of 1:39 p.m. in Tokyo, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 fell 2/32, or 63 cents per $1,000 face amount, to 103 9/32.
The Institute for Supply Management said its index of non- manufacturing U.S. businesses rose more than expected to 50.9, exceeding the dividing line between expansion and contraction for the first time in a year. The MSCI Asia Pacific Index of regional shares advanced 1 percent, halting a three-day decline.
Debt Sale
Three-year Treasuries yielded 1.38 percent, compared with a high yield of 1.487 percent at the previous auction of the securities on Sept. 8. That sale attracted bids for 3.02 times the amount on offer, the most for that maturity since November 2008. The three-year security to be sold today yielded 1.41 percent in pre-auction trading.
Yesterday’s $7 billion auction of 10-year inflation- protected notes attracted bids for 3.12 times the amount on offer, the highest so-called bid-to-cover ratio since January 1999. The U.S. last sold the combination of 10-year TIPS, three-, 10- and 30-year debt in the week of July 6, when it issued a total $73 billion of securities.
Ten-year yields were within 13 basis points of a four-month low as Federal Reserve Bank of New York President William Dudley said slowing inflation is “problematic” and interest rates should stay low. His remarks bolstered comments made in minutes of the Fed’s September meeting that “inflation will remain subdued for some time.”
‘Deflationary Pressure’
“The economy is trapped in deflationary pressure and the perception that the Federal Reserve will keep interest rates low for a long time is prevailing,” said Akira Takei, a manager in the international bond department in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “We’ve added to our long-end positions, in the 15-year region.”
The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, has narrowed to 1.73 percentage points today from this year’s high of 2.13 percentage points in June.
Dudley’s “bullet points come across dovish,” Kenny Borowicz, a senior vice president at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options contracts, wrote today in a note. The comments “may prove supportive for Treasuries across the curve.”
Futures on the Chicago Board of Trade show a 58 percent chance the Fed will refrain from raising its target rate for overnight lending between banks by March, compared with 51 percent odds a month earlier. The Fed cut its benchmark rate to a range of zero to 0.25 percent at the end of 2008.
The central bank is scheduled to buy Treasuries due February 2020 to February 2026 tomorrow.
The Fed has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, people with knowledge of the discussions said last month. In a reverse repurchase agreement, the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
